Nick Scali Limited's (ASX:NCK) dividend will be increasing to AU$0.25 on 25th of October. The announced payment will take the dividend yield to 5.6%, which is in line with the average for the industry.
Nick Scali Is Paying Out More Than It Is Earning
Solid dividend yields are great, but they only really help us if the payment is sustainable. The last dividend was quite easily covered by Nick Scali's earnings. This indicates that quite a large proportion of earnings is being invested back into the business.
Looking forward, earnings per share is forecast to fall by 22.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 98%, which could put the dividend in jeopardy if the company's earnings don't improve.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the first annual payment was AU$0.09, compared to the most recent full-year payment of AU$0.65. This implies that the company grew its distributions at a yearly rate of about 22% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's encouraging to see Nick Scali has been growing its earnings per share at 26% a year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.
Nick Scali Looks Like A Great Dividend Stock
Overall, a dividend increase is always good, and we think that Nick Scali is a strong income stock thanks to its track record and growing earnings. The earnings easily cover the company's distributions, and the company is generating plenty of cash. If earnings do fall over the next 12 months, the dividend could be buffeted a little bit, but we don't think it should cause too much of a problem in the long term. Taking this all into consideration, this looks like it could be a good dividend opportunity.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 2 warning signs for Nick Scali (1 is potentially serious!) that you should be aware of before investing. We have also put together a list of global stocks with a solid dividend.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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